Advanced Underwriting Consultants

Question of the Day – June 1

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My deceased former client named her living trust the beneficiary of an IRA.  There are two primary non-spouse successor beneficiaries of the living trust.  Can the trustee of the trust arrange for the IRA account to be split into two parts—one for each beneficiary—and can each beneficiary stretch her own part based on her life expectancy?

Answer: For many living trusts we think the answer is yes, as long as the trust portions can be settled in favor of the two trust beneficiaries by September 30 of the year following the taxpayer’s death.

The IRS has issued regulations and letter rulings over the past few years on how trusts may be used in conjunction with stretch planning.  Beneficiaries of a trust may be treated as designated beneficiaries—and qualify for stretch treatment–if four requirements are met:

  1. The trust is valid under state law,
  2. The trust is irrevocable, or becomes irrevocable upon the death of the grantor,
  3. The beneficiaries of the trust are readily identifiable from the trust itself, and
  4. A list of beneficiaries or a copy of the trust is provided to the IRA by October 31 of the year following the date of the grantor’s death.

These types of trusts are referred to as look-through trusts.  The oldest beneficiary of a look-through trust is considered to be the designated beneficiary for stretch purposes.

If the beneficiaries are widely separated in age, using the oldest as the measuring life for stretch purposes may not give the optimal result.  It may make sense to plan on the front end to

  • Divide the IRA into multiple accounts, and
  • Direct each of the accounts into separate look-through trusts for each one of the beneficiaries

in order to maximize the control and tax aspects of the IRA planning.

If a trust has a defect that keeps it from being a look-through trust, it’s not necessarily fatal to keeping the stretch options open.  If the trust permits, the defect may be removed by September 30 following the date of the decedent’s death.  If that is done, the trust may then qualify as a look-through trust—and stretch options may again be available.

In today’s question, if the living trust has just the two beneficiaries and the trustee is able to separate the trust—and accompanying IRA share—in their favor by the September 30 deadline, each of the beneficiaries should be able to exercise their own stretch options with regard to the separate share.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.